Lord Justice Ralph Gibson: This is an appeal, brought with the leave of Steyn J, by first, third, fourth and fifth defendants against his order of 16 July 1991 in an action brought by Harbour Assurance Co. (UK) Ltd. by that order Steyn J (1992) 1 Lloyd’s Rep 81 dismissed the application by the defendants for a stay of the action under section 1 of the Arbitration Act 1975.

This case raises the question whether in English law, under the principle of the separability or autonomy of the agreement expressed in an arbitration clause, which clause is contained in a written contract, the clause can give jurisdiction to the arbitrators under that clause to determine a dispute over the initial validity or invalidity or the written contract, upon the assumptions that upon its true construction the arbitration clause covers such a dispute and that the nature of the invalidity alleged does not attack the validity of the agreement expressed in the arbitration clause itself.

The orthodox view in English law has always been, it has been said for the plaintiffs, that if the contract in which the arbitration clause is contained is void ab initio (自始无效), and therefore nothing, so also must be the arbitration clause in the contract. That is the proposition that nothing can come of nothing: ex nihil nil fit. It has also been called in this case the argument of logic.

As a result of agreement between the parties the only issues considered by him were whether, as the defendants alleged, the arbitration clause was wide enough to cover the illegality issued, and whether there was no impediment in law to giving effect to the arbitration agreement.

For the reasons set out in his judgment, Steyn J concluded that he was compelled by authority to hold that the principle of separability could not extend so as to enable the arbitrator to determine whether or not the contract, in which the arbitration clause in contained, is in fact void ab initio for illegality. He therefore dismissed the application for a stay of proceedings in which the plaintiffs seek to establish that illegality.

The appeal by the defendants was directed only to the last passages of the judgment by the judge, by which he held that he was required by authority to hold as he did. In all other respects the defendants adopted and supported the conclusions and reasoning of the judge.

In brief summary, the judge held as follows.

1. The principle of the separability of the arbitration clause or agreement from the contract in which it is contained exists in English law; and, provided that the arbitration clause itself is not directly impeached, the arbitration agreement is, as a matter of principled legal theory, capable of surviving the invalidity of the contract so that the arbitrators could have jurisdiction under the clause to determine the initial validity of the contract. Further, it would be consistent to hold that an issue as to the initial illegality of the contract is also capable of being referred to arbitration, provided that any initial illegality does not directly impeach the arbitration clause.

2. The illegality alleged in this case does not impeach the arbitration clause.

3. The arbitration clause on its proper construction is wide enough to cover a dispute as to the initial illegality of the contract.

4. To his evident regret, however, Steyn J was driven to hold that the principle of separability could not apply when the alleged ground of invalidity of the contract was initial illegality.

The contentions of the plaintiffs, in their respondents’ notice, included:

(1) The judge was wrong not to hold that the non-arbitrability of an issue of initial illegality was established by the reasoning of the majority in Heyman v. Darwins Ltd (1942) AC 356.

(2) English law has adopted the principle of separability only so far as to leave disputes as to initial validity or legality outside the jurisdiction of arbitrators.

(3) The logical ground for excluding the arbitrator’s jurisdiction in cases of initial invalidity and initial illegality is ex nihil nihil fit, and it would be contrary to logic and principle to differentiate between cases of “direct” and “indirect” invalidity of the arbitration clause.

(4) Disputes as to the legality of the contract do impeach the arbitration clause contained in the contract either directly or sufficiently directly to exclude the arbitrator’s jurisdiction.

(5) Lastly, this arbitration clause is not wide enough to cover disputes as to the initial validity of the retrocession agreement, or disputes as to illegality.

The policy consideration which is of greatest weight, in my judgment, is what the judge called the imperative of giving effect to the wishes of the parties unless there are compelling reasons of principle why it is not possible to do so.

The first argument for the plaintiffs, that is, the orthodox view to which we are invited to adhere, is based on the logic of the proposition that nothing can come from nothing.

The reference to an extraordinary arbitration clause as possibly outside the logical proposition is in effect an argument that, for the principle of separability to be applied so as to save the clause from voidness by reason of the voidness of the containing contract, special words are needed. I do not accept this argument. An arbitration clause, in ordinary terms – that is to say, without special words to ensure survival – is usually, and has been held to be, a self-contained contract collateral to the containing contract. As with any other contract, it must be construed according to its terms in and with regard to the relevant factual situation. I see no reason to establish a principle of this nature which would require special words to be inserted in order to secure that which the parties would probably suppose was covered by the ordinary words.

Mr. Longmore pointed out that a party to a contract the making of which he says was induced by fraud, would be surprised to be told that he is bound to have the issue tried by an arbitrator appointed under a clause in that contract. He also pointed out that when such a party alleges that the contract is void for illegality, he might well be astonished to be told that the issue of that illegality is to be determined by an arbitrator appointed under it.

There is, I think, forceful comments. Steyn J said that the question of fraud or initial illegality was capable of being referred to arbitration. He did not qualify the clearly stated principle that if the validity of the arbitration clause itself is attacked, the issue cannot be decided by the arbitrator. His reference to direct impeachment was, as I understand his judgment, to distinguish an attack upon the clause otherwise than by the logical proposition that the clause falls with the containing contract. When it is said that the contract was induced by fraud it may well be clear that, if it was, the making of the independent arbitration clause was also induced by the fraud. There is, further, the power of the court under section 24(2) of the Arbitration Act 1950, considered by Steyn J. (1992) 1 Lloyd’s Rep 81,88.

Next, as to illegality, the question whether the particular form of illegality will, if proved, render void both the contract and the arbitration clause must depend upon the nature of the illegality and, as Hoffmann L.J. pointed out in the course of argument, when it is said to consist of acts prohibited by statute, upon the construction of the relevant provisions of the statute.

In my judgment, Steyn J. was right to hold that, as a matter of construction of the contract, the present clause covers the issue of illegality, and his conclusion does not conflict with the judgment of Nourse L.J. in the Fillite case with which Hollings J. there agreed.

In agreeing that “all disputes or differences arising out of this agreement shall be submitted to the decision of two arbitrators,” the parties were indeed presupposing that “the agreement” had some relevant existence. For this purpose I think “the agreement” means the act of the parties recorded in the document, which contains the mutual promises, which they have made. The meaning and effect of those promises with references to their subsequent acts would be determined according to law and, if necessary, under the proviso for arbitration. The words must be construed by reference to any relevant facts (see Prenn v. Simmonds (1971) 1 WLR 1381) but there has been no reliance on any particular circumstances for this purpose other than those evident from the making of the contract itself. The question whether all the promises contained in the agreement were rendered invalid and void at the time when the parties signed the documents by the illegality of the agreement, is, in my judgment, a dispute arising out of the agreement.

There was much material put before the court to which I have not referred. The material was provided to us before the hearing so that we were able to read it before the argument commenced. We are indeed grateful for this assistance. I have not referred to the authorities copied, to the extracts from textbooks and articles, and to the reports of decisions in the courts of the United States, Australia, Germany and Bermuda. In a case of this nature it was, I think, of importance that we be shown this material so that we should be instructed as to the development in this part of the law in other jurisdiction. The parties were not at one as to the precise direction and extent of such development. It is sufficient in my judgment to say that I have read much that has encouraged me to reach the conclusion expressed in this judgment, and nothing to suggest that in doing so I would be ignoring any substantial matter of policy or departing from any principle which should form part of the development of the common law.

I would allow this appeal.

Questions for discussion:

1. Whether the arbitration tribunal could award on the dispute over the initial invalidity or illegality of the contract upon the assumptions that upon its true construction the arbitration clause covers such a dispute and that the nature of the invalidity alleged does not attack the validity of the agreement expressed in the arbitration clause itself ?

2. If the contract in which the arbitration clause is contained is void ab initio, and therefore nothing, how about the arbitration clause in the contract therein?

3. Whether the validity or illegality issue of a contract could be arbitrated ?